The Battle For Bitcoin: What You Need To Know About Bitcoin And Bitcoin Cash

Bitcoin has been caught up in a protracted scaling debate since early 2015, when the first solutions were proposed by Jeff Garzik, Gavin Andresen and Mike Hearn, all well known and respected bitcoin core developers at the time. Each of these proposed changes revolved around a quick increase to the blocksize, the individual blocks that make up the blockchain, and a corresponding non-backwards compatible upgrade of the protocol known as a hard fork.

A significant number of the other respected developers, who have since evolved to be the leading voices of the current Bitcoin developer community, disagreed with the need to scale via the blocksize and a hard fork. This group would later propose Segregated Witness, typically shortened to SegWit, an upgrade that would enable more sophisticated scalability methods that have been proposed but have yet to be implemented. Segwit was memorialized as Bitcoin Improvement Proposal #141 in late December of 2015.

There has been a two year controversy over which type of scaling solution would succeed. During this time, original core contributor Mike Hearn, tired of the stalemate, publicly declared Bitcoin dead and moved on.

In 2017 users banded together to activate a soft fork, which is a backwards compatible upgrade, known as UASF, activating SegWit. The mining community, which was the main force blocking the upgrade to BIP 141, responded with their own user activated hard fork, or UAHF, to enable a blocksize increase as the main scaling method. Thus, we now have Bitcoin (BTC) from the UASF blockchain and Bitcoin Cash (BCH) from the UAHF blockchain. As an entrepreneur looking into the industry, here is what you need to know about the two technologies before choosing which you're going to use.

We need to understand some of Bitcoin's inner workings in order to assess what is happening here. There are five types of stakeholder in any Proof of Work blockchain cryptocurrency. Developers create the blockchain software, Miners handle the double spending verification of transactions, Nodes store the blockchain and process transactions on the network, and those transactions can be initiated by either Users or Applications. While the users and applications drive the value of a particular distributed network, the distributed, trustless infrastructure of Bitcoin relies on a delicate balance of power between Developers, Miners, and Nodes.

Failure to agree can get messy. While anyone can become a Miner, Node, or Developer, Miners and Nodes can reject code built by Developers, Nodes can reject types of transactions Miners attempt to process, and Miners provide security to the network in exchange for the chance to profit by the collection of processing fees and new coins. If any one component misbehaves, the process of upgrading the system breaks down.

Every 10 minutes, Miners create blocks of transactions and add this block to the previous transactions held in the public ledger maintained on the Nodes, which will hold those blocks in perpetuity. Each block had a blocksize of one megabyte, which works out to approximately seven transactions per second. Once the transaction limit was reached, the rates shot up. Instead of a few cents, transactions are now $5 or even $10 if you need them done quickly. More patient users can set a low fee, but they may have to wait seventy two hours for a transaction to clear.

So the question was, how to best fix this problem? The easy answer was to change just a bit of code by increasing the blocksize, which is the amount of transaction data that can be entered into a block. In just one day, you could solve all the congestion issues. But many developers were quick to point out that this was not a good solution because increasing the blocksize would put more cost onto nodes, who are not financially incentivized and may turn off their systems. Unlike the Bitcoin Network, which hits max capacity at seven transactions per second with a one megabyte blocksize, the VISA network, one of many networks that Bitcoin seeks to supplant, can handle 24,000 transactions per second. The storage, server and internet quality requirements of Nodes would be several orders of magnitudes greater, thus limiting the ability for everyday users to run Nodes and have a vote in the ecosystem. The idea of fewer Nodes creates the fear that there would be too much trust required of Miners as power would become increasingly centralized around that type of stakeholder.

Naturally, most of the Miner community rallied around the blocksize increase, whereas most of the developers and technically minded Users rallied around second layer solutions that would be enabled by SegWit. There was a stalemate; many Users and Applications who just wanted a solution to be implemented were left unsatisfied. This was the situation that led to the split into Bitcoin (BTC) and Bitcoin Cash (BCH).

Giacomo ZuccoGiacomo Zucco

To understand the difference between the two technologies, I spoke with Giacomo Zucco, a theoretical physicist, who previously worked as an IT consultant at Accenture for 5 years and now runs BHB Network, a non-profit Bitcoin R&D lab that funds several core Bitcoin Developers, such as Peter Todd. He mentioned 4 main differences between Bitcoin and Bitcoin Cash:

Continuity

The most relevant difference between the two technologies is the continuity of consensus with the original blockchain without any kind of contentious hard fork on the specific timeline of Bitcoin. The rules on the Bitcoin blockchain are in continuity with the software. If you were running software that was available the moment that Bitcoin creator Satoshi Nakamoto left the project, this software will still recognize non-SegWit and SegWit transactions as valid (even if without full understanding of the SegWit ones). Bitcoin does not change the consensus rules without having an overwhelming majority of the ecosystem, such as developers and investors, in consensus.

When Zucco talks about “software”, he is referred to software being run by Nodes. Nodes are the keepers of the blockchain's data, they define the rules of system, ensuring Miners follow those rules. Having software that is compatible with Node software releases from the time Satoshi Nakamoto left the project maximizes the number of Nodes participating in the blockchain, which enhances the security and trustlessness of the project.

Zucco goes on to explain Bitcoin Cash in terms of continuity,

BCash is a new altcoin. It is different from other altcoins like Ethereum because it shares a part of it’s history with Bitcoin, which is why I call this subset of altcoins, forkcoins. However, it is still an altcoin in the same way BiGold and Byteball are altcoins, but with an airdrop to Bitcoin holders. While many in the BCash ecosystem say that there is an ideological continuity that Bitcoin does not have, the software is in technical discontinuity.

Style of Development

Development of BCH is controlled by a very small group of people. In Bitcoin, the number of contributors to GitHub history includes old and new individual contributors, company contributors and anonymous contributors. Development in Bitcoin mirrors a Free Open Source Software (FOSS) style, which includes strict peer review before release. However, the fork coins like BCH and Bitgold have small developer ecosystems that are not strict and have little to no peer review.

The Bitcoin infrastructure, which manages $160 billion in value, is developed openly and cautiously, while being supported by a deep ecosystem of exchanges, wallets, and Developers. Bitcoin Cash, which is relatively new, is developed by a small set of Developers. When it comes to managing billions of dollars of user funds on top of delicate decentralized cryptographic infrastructure, the need for peer review is very important. A lack of sufficient peer review can end with millions of dollars lost or stuck due to a single incorrect line of code (e.g. parity multi-signature hack).

Lack of Segregated Witness

BCH does not have Segregated Witness. This upgrade, which solves transaction malleability and various other technological issues, is required to allow for advanced smart contracts on Bitcoin. Now that transaction malleability is fixed, upgrades like efficient payment channels, Lightning Network, TumbleBit, Complex coinjoins and other smart contract systems will be possible. These upgrades are important for privacy and off-chain scalability solutions.

BCH has large blocks

Bitcoin now has a theoretical maximum of approximately four megabyte blocks, one meg of transaction data and three meg witness data. BCH has double the size, 8mb blocks.

Given all of the benefits of the Bitcoin blockchain, such as higher security through many Nodes, heavily peer reviewed upgrade process, and the future potential for smart contracts and privacy, why would someone be interested in Bitcoin Cash?

Ryan X Charlesnews.bitcoin.com

The simple answer is that users want scaling to happen now. I spoke with Ryan X Charles, the CEO of yours.org, a new micropayments social media platform, to discuss how the scalability debate was hurting their platform,

Yours is a social network with a built-in payment system, where people get paid for creating and discovering good content. There are three payment models in the app. The first is a voting model, where you pay 0.10 for an upvote and that 0.10 is split with all the people who upvoted previously. The second is a paywall that has options for paying between .01, .10, .25 and $1. The highest paid articles use paywalls. The last is a paid comments feature, where authors can set a price to comment on an article, which dramatically reduces the amount of post trolling.

For us, the only thing that matter is that we have a system that enables low fees and are non-custodial [meaning we don’t hold the funds]. Using PayPal or stripe for micropayments around $.05 to $0.10 just doesn’t work. Because of the rising fees on Bitcoin and the lack of clarity around the launch of SegWit and Lightning, we spent a year to a year and a half building our own payment channel system. The fees on Bitcoin were so high, that we had to switch to leveraging our payment channel infrastructure on top of Litecoin.

There were some issues working with our payment channels, for instance, you could not send arbitrarily low amounts of value until half the channel was spent. The first payment in the channel had to be higher than on-chain fees, otherwise you cannot close a channel. Funding payment channels would take a long while.

To clarify, payment channels are second layer protocols that can help scale bitcoin. They are the technology behind the Lightning network, which is the most popular solution within the Bitcoin community for scaling. Charles goes on to explain how Bitcoin Cash helped their business,

When Bitcoin Cash came out, the fees were so low that we could use the infrastructure without the need of payment channels. So we did and we removed about 10,000 lines of code associated with the payment channels to launch our beta on August 25th. BCH completely solved the problems we had. The on-chain scalability approach was much better for usability. Users can cash in, immediately start making payments, then cash out. No need to wait for confirmations since the micropayments were small and not very high risk of double spend.

When we made the switch to BCH, the payment system became radically more reliable and the users felt it. We had over twenty fold growth increase, from ninety users a day to over two thousand after the switch.

Roger Verhttps://www.bitsonline.com

This is not the only case of a company switching over from Bitcoin to Bitcoin cash. I spoke with Roger Ver, an early bitcoin investor who invested in companies such as blockchain.info, Kraken and purse.io, the CEO of bitcoin.com and one of the top thought leaders around Bitcoin Cash, who explained,

Some of the most popular sites in the history of Bitcoin like Satoshi Dice have switched completely over to BCH because it provides a much better user experience than BTC. Bitcoin.com’s wallet now offers full support for BCH. We will see many more in the coming days. BTC has been morphed into a settlement layer with high fees and unreliable confirmations. BCH allows anyone to send or receive any amount of money with anyone in the world, instantly, and basically for free.

So if you are running a company that is relying on microtransactions and needs a solution today, Bitcoin Cash just might be that. But is that really the killer use case that everyone is looking for? People often speak of how Bitcoin can help underserved populations.

Foxbit FrontpageFoxbit

To learn more, I spoke with Felipe Trovao, one of the founders and the head of compliance of Foxbit, the exchange that handles 50% of Brazil's Bitcoin.

In many countries in Latin America, including Brazil, there are many problems with the government. Specifically, the governments often does not take very good care of the local currency, typically inflating the currency a lot. The government is too close with the banks, so the people do not trust neither the government nor the banking institutions. People see Bitcoin as an alternative to the traditional banks and people are discovering it because it is easy to trade and convert to local currency.

In Brazil, bitcoin users are looking to the technology as a store of value to protect their net worth against inflation. Trovao goes on to explain,

Most clients are looking for Bitcoin instead of Bitcoin Cash. My clients all sold their BCH for BTC, which is why we are seeing the recent jump in price in BTC. While some very few people like the BCH technology, the community in brazil doesn't want Bitcoin Cash.

Unlike the case of yours.org, Brazil's underserved, who don’t trust their banks or their government, are currently looking for a store of value in Bitcoin instead of microtransactions. If a cryptocurrency is to be a good store of value, it must be censorship and corruption resistant through decentralization, so that banking institutions or corrupt governments are unable to influence or control the network. Nodes are required to maintain strong decentralization as a check against the trend of Miners towards monopolization, so Bitcoin meets this need of Brazilians.

Zucco further explains that the decentralization advantage of Bitcoin goes beyond the blocksize,

The centralization risk of Bitcoin Cash is not [just] because of the eight megabyte block, but because it started outside of global consensus of Bitcoin, with a small group of developers controlled by ASIC producers and corporations instead of a free, open source project.

Charles agrees that Bitcoin Cash is a payment mechanism and not a store of value,

We really like Bitcoin, we wanted to use it, which is why we created payment channels, but there was no way for us to us it economically, which is why we switched to Bitcoin Cash. We don’t expect Bitcoin Cash to be a store of value, but as a micropayment platform. In the future, our users will be using the platform and not even realizing that they are using cryptocurrency at all. Everything will be denominated in dollars, with credit card on-boarding. The system will be absolutely seamless. If at some point, there become scaling issues on Bitcoin Cash, which we don’t anticipate, we would definitely use a better technology if something came along.

So while Bitcoin Cash seems to be the technology of choice for those looking for micropayments today, Bitcoin is the long term choice for a store of value. Although Bitcoin Cash solves the short term problems for many entrepreneurs looking into the micropayments industries, there are strong long term prospects for Bitcoin smart contracts, privacy and microtransactions on top of second layer protocols like the lightning network. In terms of regular sized transactions, my company, Bitwage, leverages Bitcoin for paying wages to international workers all around the world in places like Brazil, Mexico, Argentina, Philippines and India. Our transactions are not micro and Bitcoin's technology is doing just fine for our purposes.

Correction: A previous version of this article misquoted Giacomo Zucco saying that Mimblewimble is a smart contract that could be enabled by Segwit. This is not the case and has since been removed from his quote.

Since 2013, I have been running Bitwage, the most popular payroll & invoicing solution built on top of Bitcoin, as founder & president. I write about entrepreneurship in blockchain.

I am the Founder & President of Bitwage, the most popular payroll & invoicing solution built on top of the bitcoin blockchain. Bitwage allows companies to offer Bitcoin benefits to employees and freelancers without any fees. Employees and freelancers can receive an...